A:

Cash dividends offer a typical way for companies to return capital to their shareholders. The cash dividend affects the cash and shareholders’ equity accounts primarily. There is no separate balance sheet account for dividends after they are paid. However, after the dividend declaration and before the actual payment, the company records a liability to its shareholders in the dividend payable account.

After the dividends are paid, the dividend payable is reversed and is no longer present on the liability side of the balance sheet. When the dividends are paid, the effect on the balance sheet is a decrease in the company’s retained earnings and its cash balance. As a result, the balance sheet size is reduced. Retained earnings is listed in the shareholders’ equity section of the balance sheet. 

However, when a company reports their quarterly results, the balance sheet only reports the ending account balances. As a result, the dividend would have already been paid and the decrease in retained earnings and cash already recorded. In other words, investors won’t see the liability account entries. 

Investors can also see the total amount of dividends paid for the period in the financing section of the statement of cash flows. The cash flow statement shows how much cash is entering or leaving a company and in the case of dividends paid, it would be listed as a use of cash for the period. 

Example

Consider a company that has 2 million common shares and declares a cash dividend for the amount of 25 cents per share. At the time of the dividend declaration, the company records a debit to its retained earnings account for the amount of $500,000 and a credit to the dividend payable account for the same amount. After the company makes the dividend payment to its shareholders, the dividend payable account is reversed and debited for $500,000. The cash and cash equivalent account is also reduced for the same amount through a credit entry of $500,000.

After cash dividends are paid, the company’s balance sheet does not have any accounts associated with dividends. However, the company’s balance sheet size is reduced, as its assets and equity are reduced by $500,000.

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